Henderson’s Ward: Why the UK can still grow 2% in 2013

The UK economy still has the chance of growing by as much as 2 per cent over the course of 2013, according to Henderson Global Investors’ Simon Ward.

The most recent figures from the Office for National Statistics suggest the economy expanded by 0.6 per cent in the second quarter of the year, up from the 0.3 per cent recorded in the previous three months.

More recent business surveys have shown that the UK continued to strengthen at the start of the third quarter. The Markit/CIPS UK Services Purchasing Managers’ Index reveals that the service sector expanded at the fastest pace in 6.5 years in July, while improvements have been seen in the PMIs for manufacturing and constructions.

Ward, who is Henderson’s chief economist, says: Strong July purchasing managers’ surveys across manufacturing, construction and services support the long-standing expectation here that the UK economy will grow by about 2 per cent in 2013. Forecasters are scrambling to upgrade their predictions but the consensus currently remains well below this level.

“Annual average growth of about 2 per cent may be achieved by a combination of upward revisions to current first- and second-quarter estimates and continued solid expansion during the second half, resulting in an increase of about 3 per cent in GDP between the fourth quarters of 2012 and 2013. The four-quarter GDP rise has surged well past 3 per cent when surveys have shown similar strength historically.”

Ward also notes that 2012 was marked by increases in the UK’s annual inflation-adjusted money supply and rise in share prices. When these two events have occurred in the past, they tend to be followed by “a solid GDP rise” in the following year. A strong pick-up in real narrow money also bodes well for the UK economy, he adds.

“The brightening of economic prospects in late 2012 [and] early 2013 was missed by an economics consensus that continues to pay little attention to monetary indicators. The average forecast for calendar GDP growth, indeed, was cut further in early 2013 as ‘triple-dip’ hysteria – unsupported by any evidence – took hold,” the economist adds.

The latest forecast from the Office for Budget Responsibility, published in March, predicts that the UK economy will expand by just 0.6 per cent during 2013. In July, the International Monetary Fund revised up its 2013 UK forecast from 0.6 per cent to 0.9 per cent.